This post is dedicated to the memory of Orni El-Ad, my mentor and friend, who introduced me to the world of taxation and taught me how to “think tax”. Orni died suddenly this weekend at the premature age of 64. May his memory be blessed.

“The Children’s Book” by A S Byatt is, without doubt, one of the most absorbing novels I have ever read. Set in the waning days of the Victorian era and first two decades of the 20th century, it is a saga of interwoven families where the adults gradually shrug off their Victorian correctness while the children gain their voice after a long period of being “seen but not heard”.

One of the most poignant moments in the book is the attendance by the chief protagonists at the gloriously atmospheric first night of J M Barrie’s Peter Pan. Fooled momentarily into nostalgia for the Darling Family and the adventures of Wendy, Michael and John, the reader quickly regains the sad perspective that this idyllic world is sliding helplessly towards 1914 and the utter carnage of the Great War.

Years ending in 14 to 18 have always given me the creeps and that book got me marching in the direction of 2014 with much trepidation. It was, therefore, with a palpitating heart that I approached the much heralded latest proposed FATCA regulations which are full of 2014, 2015, 2016, 2017 and beyond (the way they are going they might even get to 2039 and  my heart will have a whole new reason to palpitate). In fairness, however, cause of death from FATCA is far more likely to be due to 389 pages of acute boredom than a grenade lobbed across the wire by Jerry.

The Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010 and, according to the latest proposed regulations, is due to commence hostilities on January 1, 2014, is a supreme effort by the US legislature to combat offshore tax evasion by US citizens. At its core it is an ultimatum to nothing less than,the entire world’s financial institutions to act as mercenaries on behalf of the US Treasury by providing information about US account holders and deducting 30% tax at source on payments to identified and suspected US tax evaders – or themselves face 30% withholding on all taxable payments from the US.

Due to wholesale opposition from America’s allies who saw this extraterritorial reach as an act of imperialist belligerence, there was, until recently, considerable doubt as to whether it would prove just another example of US saber rattling. However, a Joint Statement on February 8 by the United States, France, Germany, Italy, Spain and the United Kingdom abandoning all those tax evaders seeking a safe haven in exchange for reciprocal spying services by the Americans, means that it is probably time for any American with anything to hide to get his head down in the trench, pull his tin hat firmly over his ears and pray.

Foreign financial institutions (FFI’s) will need to enter into an agreement with the IRS sometime during  the first six months of 2013 in order to be in place for the first winter offensive starting January 1, 2014. In 2014 and 2015  names, addresses, taxpayer identification numbers, account numbers and account balances will need to be reported, while in 2016 any income paid to an account will be required. From 2017 gross proceeds paid to the account will be demanded.

In the meantime, with effect from 2014, participating FFIs, having performed appropriate due diligence to identify their American customers, will need to start withholding 30% tax on such payments as US source dividends, interest and royalties to recalcitrant individuals (basically anybody who is not willing to play) and recalcitrant non-financial foreign entities (NFFEs) aka companies with more than 10% US ownership. Such payments to non-participating FFIs would suffer the same fate. From 2015 proceeds from asset sales will also be subject to withholding.

Implementation of the  most Rambo-like proposal has been postponed until  2017 at the earliest and will likely be hit by a stray, but lethal, shell sometime before that. With a view to really thrusting and turning the bayonet, the IRS want to force the participating FFIs to withhold tax on payments that do not even originate in the US using a formula based approach of applying the ratio of US to non-US assets on the FFI’s balance sheet to its payments to recalcitrant individuals and NFFEs. Well boys, you can push your luck and go “over the top” whenever you like but don’t be surprised if  the other side is just waiting to see the whites of your eyes before halting you in your tracks.

Not all entities will need to enter into an agreement with the IRS, an exemption applying to those where the risk of recalcitrant Americans hiding under a tarpaulin in the corner of the trench is not great. Considering the requirements for becoming a deemed FFI, it is not entirely clear what the advantage over entering into an agreement is and it has been suggested that it may just be a decoy.

Ultimately, it is the buy-in by foreign governments that will make this work. Local secrecy laws could have totally derailed the project whereas it is now likely that agreements will be worked out with participating governments for information to be provided to them for sharing with the US authorities. Meanwhile, banks in several jurisdictions are shouting “Yankee, go home” to their  American customers before the regulations come into force.

Looking to the future, the tax evader’s lot is not an enviable one as he is forced to retreat with his  funds into undesirable corners of the world where their risk of loss is greater. As the world goes global places to hide, like Peter Pan’s Neverland, are ever harder to locate. The IRS recently announced yet another Amnesty, offering offenders the chance to wave a white flag and pay their way out of trouble. In the meantime, advanced troops were sent in to lay Switzerland waste. Speculation is now rife as to where the crusading troops will go next .

The attitude of  the US authorities can probably best be summed up by the chorus of the most famous American song of the First World War:

Over there, over there,
Send the word, send the word over there
That the Yanks are coming, the Yanks are coming
The drums rum-tumming everywhere.
So prepare, say a prayer,
Send the word, send the word to beware –
We’ll be over, we’re coming over,
And we won’t come back till it’s over, over there.

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